What is Cash Flow and Why is it Important for Small Business?

What is Cash Flow and Why is it Important for Small Business?

Think of cash flow as the blood running through the arteries of your small business. You use it to do those important things that keeps everything moving like buying stock, covering expenses and paying staff.

Small Business Trends contacted several experts to get a complete overview of what cash flow is and why it’s so important to your enterprise.

What is Cash Flow?

Basically, this is one of the best bellwethers for your small business. It shows the money that your small business has in the pot after paying out all the different debts and draws on your money. Cash flow gives you a good idea if you’re in a position to expand.

Why Is It So Important?

Stefanie Ricchio, a CPA/CGA, Author and Professor, further defined cash flow and some of the economic rough patches that make paying attention to it so critical.

“Cash Flow or what is commonly referred to as Working Capital is the heart of any business,” she writes.  “Without it a business cannot survive.  Many small business owners make the mistake of spending without consideration for the future. For example, buying excess inventory that ties up cash in inventory versus having it readily available to meet short and long term obligations of the business.”

How Does it Impact Small Business Loans?

She also notes that cash management is even more important when you consider how tight the banks are with small business loans and other money vehicles that can be used when cash runs short.

“Additionally, smaller businesses run the risk of losing employees, suppliers and facing interest and penalties as a result of poor cash management,” she writes adding that staying current on cash needs means balancing some of the other aspects of your business like tax payments, accounts receivable and inventory. That’s the best way to understand how much money you need in the system for each period.

“This must then be compared to the estimated cash receipts for the same period to determine whether or not the cash flow will be sufficient.”

Think of it as a balancing act of sorts.

How Do You Improve Your Cash Flow?

Of course, most small business owners want to know how to improve their cash flow and keep their business healthy. There’s a few good suggestions including leasing rather than buying equipment and even real estate. This is one of the best ways to make sure that you’ve got money for day-to-day operations because leasing allows you to pay in smaller chunks which boosts your cash flow.

 How Do Credit Checks Help?

If your customers pay in cash you can bypass this step. Otherwise it’s a good idea to do credit checks on all the clients who want credit to purchase your goods and services. Every small business hankers to make that extra sale, but late payments always take a dent out of your cash flow in the end.

Charlie Whyman is a Business Development Strategist and Marketing Trainer. She added that staying on top of things was also critical by “ maintaining control on your payment terms and be clear with your customers what they are before they purchase.”

Why are Down Payments Important?

She also says that asking for a down payment or a deposit on certain kinds of capital purchases is a good idea. That way you are not fronting the cost yourself. She also says that small businesses need to include all the necessary tax payments in their cash flows.

She also suggests bookkeeping remain simple.

“You can easily manage your cash flow using an excel spreadsheet, you don’t need fancy software to do it unless you have a lot of cash coming in and going out of the business,” she writes. “The more control over the numbers in your business, the better you will be set up for growth”.

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Rob Starr Rob Starr is a staff writer for Small Business Trends. Rob is a freelance journalist and content strategist/manager with three decades of experience in both print and online writing. He currently works in New York City as a copywriter and all across North America for a variety of editing and writing enterprises.

3 Reactions
  1. Cash flow indicates how well a business is performing. At the end of the day, it is not about your projected money but the actual money that you are holding.

  2. Great article… the old maxim that small businesses fail for 3 reasons… cash flow, cash flow and cash flow is still a reality and SMBs need help to manage their cash. [Edited by editor]

  3. I think that the application of modern cash flow management tools will help businesses of all sizes to keep track of their income and spendings more efficiently. For SMBs, sгch software doesn’t have to be fancy, as Charlie Whyman mentioned in the article, but should provide users with the basic features needed to get valuable analytics and a possibility to plan further business development.

    These tools help to automate routine tasks and calculations, thus decreasing the number of human errors and providing a more accurate analysis of the business state. Every small business has an opportunity to grow if it manages its cash flows wisely.